DAOs Make Peace With ‘Legacy Legal’ Requirements

Registering Like Companies Brings a Slew of Opportunities, and Challenges, for Digital Co-ops

With the anarchic days of DeFi Summer long past, many DAOs have finally succumbed to the inevitable — they’re establishing formal legal structures.

Yet the process may pose as many challenges as it does opportunities.

The evolution of decentralized autonomous organizations was a major story this year. DeFi’s top projects have grown from fledgling experiments holding a few million dollars in TVL to industry stalwarts driving billions worth of decentralized financial activity. Many projects have made deals with TradFi institutions, at once bolstering and complicating their operations and spurring debate among their members.

Real World Assets

For protocols embracing real-world assets (RWAs) such as bonds and bank loans, forming legal entities is imperative.

MakerDAO deepened its ties to TradFi companies in 2022. The community approved doing business with Huntingdon Valley Bank, a 151-year-old Pennsylvania lender, and in a separate project it joined forces with a blockchain-focused subsidiary of Societe Generale, France’s No. 3 bank. Maker also hooked up with Prime, the institutional arm of Coinbase, the U.S.-based centralized crypto exchange.

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The deals augur growth for MakerDAO’s top line, but more complexity, too. MakerDAO is poised to reorganize into a series of subDAOs, or “MetaDAOs,” to better manage its increasingly diverse operations. Each MetaDAO will be governed by its own tokenomics that are separate from Maker’s MKR token.

Under this system, integrations with real world assets would become the primary responsibility of a specific RWA-focussed MetaDAO, with that MetaDAO needing to secure the licensing required to interact with mainstream financial institutions.

Eli Cohen, General Counsel at Centrifuge, a DeFi protocol facilitating traditional financial deals with real-world businesses, told The Defiant that it takes careful planning to set up the legal structures needed to facilitate DAOs partnering with legacy institutions.

Legacy Institutions

“By proactively working with and educating legacy institutions, DAOs can partner with real-world asset entities,” Cohen said. 

Sushi, the fifth-largest decentralized exchange by TVL, is also overhauling the structure of its DAO to maximize revenue opportunities. But the DEX is also adding a lot more complexity to its structure. 

In October, the Sushi community voted near-unanimously in favor of a plan to form three entities in the Cayman Islands and Panama that will oversee myriad aspects of the project’s operations.

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A Cayman Islands-based DAO foundation will administer on-chain governance and manage Sushi’s treasury, while a Panamanian foundation will develop and maintain the protocol’s code. A Panamanian corporation will operate Sushi.com’s front-end interface for the protocol.

As one of DeFi’s oldest and most anarchic projects, Sushi’s embrace of legal structures demonstrates the challenges confronting the maturing sector. Many projects must now balance being permissionless and decentralized with taking on board complicated regulatory and business priorities. 

Legal Structures

The willingness of regulators to take action against decentralized entities in 2022 may also inspire DAOs to adopt formal legal structures, as decentralized governance no longer appears to be sufficient to skirt the purview of lawmakers. 

The Biden Administration’s crackdown on Tornado Cash, for instance, is prompting DAO members to make sure their projects are protected from sanctions and penalties. This entails engaging with traditional ways to register companies and not relying solely on smart contracts. 

In August, top teams including Aave and Uniswap Labs blocked wallet addresses associated with the coin mixing service Tornado Cash from using their front-end interfaces after Tornado Cash was sanctioned by the U.S. Treasury Department.

However, community members have criticized the legal entities associated with DeFi protocols for being vulnerable to regulatory coercion. As DAOs continue to evolve, these types of debates are bound to intensify.